Module 3: Reconstruction of Joint Stock Company

(Internal Reconstruction Only – As per NEP-2020, SRTMU, Nanded)

3.1 Meaning and Need of Reconstruction

Meaning of Reconstruction

Reconstruction refers to the reorganisation of a company’s financial structure to remove accumulated losses and improve financial position without dissolving the company.

When the same company continues, it is called Internal Reconstruction.

(मराठी टीप: कंपनी बंद न करता आर्थिक पुनर्रचना करणे म्हणजे Internal Reconstruction.)

Need / Objectives of Reconstruction

• To write off accumulated losses

• To reduce over-capitalisation

• To improve balance sheet position

• To attract new investors

• To continue business smoothly

(Exam Tip: “Need of Reconstruction” is a frequent theory question.)

3.2 Types of Reconstruction

1️⃣ Internal Reconstruction
2️⃣ External Reconstruction

As per SRTMU syllabus, ONLY Internal Reconstruction is required.

3.3 Forms of Internal Reconstruction

Internal Reconstruction may take place through:

1. Reduction of Share Capital

2. Reduction of Debentures

3. Reduction of Creditors’ Claims

4. Revaluation of Assets and Liabilities

5. Writing off fictitious assets and losses

(मराठी टीप: हे सर्व changes एकाच वेळी होऊ शकतात.)

3.4 Accounting Entries for Internal Reconstruction

Capital Reduction Account

Capital Reduction Account is opened to:

• Transfer sacrifices made by shareholders and creditors

• Write off losses and overvalued assets

Journal Entries (Important)

1. Reduction of Equity Share Capital

2. Reduction of Preference Share Capital

3. Reduction of Debentures

4. Reduction of Creditors

5. Writing off Losses / Fictitious Assets

(मराठी टीप: Capital Reduction Account हा Internal Reconstruction चा मुख्य आधार आहे.)

3.5 Revised Balance Sheet after Internal Reconstruction

Teacher’s Instruction:
Prepare Revised Balance Sheet in BOTH formats.

A) Revised Balance Sheet – OLD FORMAT

(Companies Act, 1956)

Balance Sheet of XYZ Ltd.
(After Internal Reconstruction)

Liabilities

• Share Capital (Reduced)

• Reserves & Surplus

• Secured Loans

• Unsecured Loans

• Current Liabilities & Provisions

Assets

• Fixed Assets (Revalued)

• Investments

• Current Assets

• Miscellaneous Expenditure (Written off)

(मराठी टीप: जुना format वापरून marks secure करता येतात.)

B) Revised Balance Sheet – NEW FORMAT

(Companies Act, 2013 – Schedule III)

Balance Sheet of XYZ Ltd.

Equity and Liabilities

1. Shareholders’ Funds

2. Non-current Liabilities

3. Current Liabilities

Assets

1. Non-current Assets

2. Current Assets

(Exam Tip: “Revised Balance Sheet” असे स्पष्ट लिहा.)

Illustrative Problem (Model Type)

Problem (Outline)

A company suffers heavy losses.
Share capital is reduced, creditors agree to sacrifice, goodwill and losses are written off.

Required:

1. Pass journal entries for internal reconstruction

2. Prepare Capital Reduction Account

3. Prepare Revised Balance Sheet in:

   • Old format (1956 Act)

   • New format (2013 Act)

(Full solved problem will be provided in Solved Numericals PDF.)

Exam-Oriented Points

• Company is not dissolved

• Capital Reduction Account is compulsory

• Losses must be written off fully

• Revised Balance Sheet must be prepared

• Format clarity gives extra marks

(मराठी टीप: Internal Reconstruction मध्ये company जिवंतच राहते.)